Hi guys, my name is Prateek. Let's get started. In the previous video, we talked about the forwards market, which is a predecessor to futures. So let's understand what futures are.
So these are parts of the futures contract. And of course, we have a buyer and we have a seller. And in our previous example, we talked about what commodity they're exchanging in exchange of money, and that was gold. Now, a futures contract is quite different from a forwards contract.
In fact, futures has all these parts. But two main differences are that a futures contract is standardized and we'll discuss that in a bit and second there is a presence of a regulator. The regulator ensures the buyer and the sellers and any other intermediaries do their job and obligations are fulfilled.
So here are the differences between a futures contract and a forwards contract. So let's understand what the futures contract is. The first thing is the underlying. So in the previous example they were exchanging gold for money.
According to that example Gold was the underlying. So an underlying could be equity, it could be gold, it could be currency, it could even be the index like Nifty or the Sensex. The underlying is what you are trading. Then we have lot size.
Lot size is the minimum amount of shares you can trade. Now think about it. In equities, you could exchange any number of shares when you are trading. But in futures, the contract is locked at certain standards.
So the lot size is the minimum quantity you trade the underlying on the futures contract. For example, if you're trading gold, it could be in minimum grams or kgs. If you're trading, say, equity, then it could be 50 shares of XYZ company and that forms the minimum lot size when you're trading futures. The contract size is next.
Now, if you think about it, it's pretty obvious. The contract size is the number of shares you are trading multiplied by the actual price of the shares or any other unit so let's suppose you are trading Tata Steel and the minimum amount of shares is this and the price of Tata Steel is right here if you multiply the two you will get the contract size or the contract value that you are trading and then we have expiry remember in the previous video we talked about our example where they were exchanging gold that was a 30-day obligation which meant that they would transact on the 30th day from the day they agreed Well, futures contracts also have a time definition of when that contract expires. And that's your expiry.
So in equity, the last Thursday of every month is expiry date, which means after that day, the contract expires and ceases to exist. So all obligations have to be completed on that day. So monthly expiry is last Thursday of every month.
There's also weekly expiry. And that also follows the Thursday pattern. A weekly futures contract would expire on the Thursday of that current week. And finally, we have margin.
Margin is a percentage that you pay off the total contract size. It's actually very simple. Imagine the contract size of a futures is about 10 lakh rupees and the margin required is 10%.
So you would pay 10% of the total contract size, that'd be 1 lakh rupees in this case. To enter into any futures contract, whether you're a buyer or seller, both parties have to put up margin. In fact, I think a better way to explain this is to show you a real example. So over here, what I'm going to do is go to NSE India's website and let's search for Infosys, I-N-F-Y.
And we can see Infosys equity or the underlying is right now trading at 1,702.05. Now, we don't want equity. We want the future. So I'll click on derivatives. And we can see we'll have the futures contracts here.
Remember, the underlying is also called the spot price. And the reason it's called spot is because people are exchanging money for the stock on the spot. There is no future date.
Hence, the underlying or the equity price is also called the spot price. Now, let's look at the futures of Infosys. We can see here it says stock futures. So that means it's Infosys stock futures.
The expiry date is 30th September 2021. And That is the last Thursday of September that month. We can see there is an open price, high, low, etc. And the last price.
You'll notice though that the last price in futures is actually different than the underlying. So, 1701.4 versus the... underlying price of 1702. It's a slight difference, but why is that? The reason is how future contracts pricing is structured, but we'll talk about that a little later. We can also see a lot size.
So let's see what lot size we have over here of stock futures. The market lot is 600 shares or 600 units in this case of Infosys for one single contract. We can also see the contract size and that's very simple. You multiply the lot size, that's 600 units, 600 shares, multiplied by the current price, that's 1,702. This number is your total contract size.
So now let's talk about margin. This is pretty straightforward. Let's assume the margin is 18% of the total contract size.
So 18% of this number is this. This is the margin or the minimum amount that will be blocked to actually trade one lot of futures. of emphasis. Now how margin works and leverage works is something that can be a little more intricate so we'll discuss that in the next video. Key takeaways from this video are